Europe & Middle East

Over 80% of Greek creditors accept debt swap

Deal applauded by IMF, European finance ministers and others

MADRID (MarketWatch) — The Greek government moved a step closer to securing a much-needed second bailout on Friday, announcing 83.5% of its private-sector bondholders agreed to a bond-swap deal, with expectations that proportion would rise.

The takeup rate was short of the 90% needed to prevent legal force to get the rest of the private bondholders to participate. As a result, Greece’s finance ministry said it had gotten approval for collective-action clauses, or CACs, which would bring the total participation rate to 96% by essentially forcing some bondholders on board.

The government has also given some bondholders an extended deadline to March 23.

The deal’s success cuts Greece’s debt burden by more than 100 billion euros ($132 billion), with the participation rate of 83.5% representing €172 billion out of the €206 billion total eligible bondholdings.

“With the support of our official sector and private creditors, Greece will continue implementing the measures needed to achieve the fiscal adjustments and structural reforms to which it has committed, and that will return Greece to a path of sustainable growth,” said Evangelos Venizelos, deputy prime minister and minister of finance for Greece.

All 15 members of an International Swaps and Derivatives Association committee — consisting of big banks like Goldman Sachs and J.P. Morgan, and investors like Elliott Management and PIMCO — ruled the move a “restructuring credit event.” ISDA will hold an auction on March 19 to determine how much will be paid out on credit-default swap contracts.

As of last week, the net exposure on CDS was $3.2 billion. So if the auction showed the recovery value to be 25%, then 75% of the $3.2 billion, or $2.4 billion, would be paid out to owners of CDS.

In a conference call Friday, ISDA Chief Executive Officer Robert Pickel said he does not see a significant impact on the financial market from the Greek default and that most of the Greek CDS exposure is collateralized.

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Eurogroup President Jean-Claude Juncker said euro-area finance ministers welcomed the outcome of the bond-swap offer, saying it will make a ”significant contribution to improve Greece’s debt sustainability.”

The statement was made following a teleconference call by those ministers to discuss the results of the bond swap. He said the Eurogroup expects the participation rate to go even higher, in light of the extended deadline for some bondholders. And it also means Greece is one step further along toward getting its second bailout, he said.

“The Eurogroup considers that the necessary conditions are in place to launch the relevant national procedures required for the final approval of the euro area’s contribution to the financing of the second Greek adjustment program,” he said.

Both euro-area finance ministers and the International Monetary Fund will hold meetings next week to seek formal approval on the bailout package.

In a brief statement, the IMF also put its stamp of approval on the deal. “This is an important step that will dramatically reduce Greece’s medium-term financing needs and contribute to debt sustainability,” said IMF Managing Director Christine Lagarde.

“This support by the private sector is a key component of the contribution by all parties to put Greece’s economy on a path of growth and financial stability,” she said.

More plaudits earlier came from the Institute of International Finance, a lobby group for the world’s largest banks that has been one of main negotiators for that side. It earlier hailed the agreement as a key step toward resolving Greece’s debt crisis.

“The debt exchange represents the largest-ever sovereign-debt restructuring. It is likely to lead to a most substantial reduction in the debt stock of Greece and a very significant decline in the amount of maturing debt to be refinanced between 2012 and 2020,” said IIF Managing Director Charles Dallara in a statement.

“The willingness of bondholders and the Greek authorities, together with the strong support of the euro area, to pursue a voluntary debt exchange is of crucial importance,” said Dallara. “It reduces the risks of contagion in the markets, while it enables Greece to build on the strengths of the reform efforts themselves.”

Cautious reaction

Markets had rallied a day earlier amid media reports that pointed to a high participation rate for the bond-swap deal. News of the deal provoked little reaction from most markets, though Europe stocks got a lift after jobless data out of the U.S.

On the other hand, Greek stocks remained jittery. The Athens General Index (GD) was off nearly 1%, while the Stoxx Europe 600 index (SXXP) rose 0.4%.

Among other weaker euro-zone countries, 10-year government bond yields in Spain eased, while in Italy, they tracked higher throughout the day. Bond prices move inversely to their yields.

Steen Jakobsen, chief economist at Saxo Bank, said Greece will get a lower debt-to-gross-domestic-product ratio out of the deal, but the price for Europe is high. The whole drama surrounding Greece will leave fixed-income investors less comfortable with buying more government debt, he said.

“The next 48 hours’ reaction and Portugal/Spain bond spreads will tell us the real success or fiasco,” said Jakobsen. “Spain’s violation of the fiscal compact and Portugal’s collapsing growth could have us back negotiating haircuts for Portugal and a new package for Greece inside the next three months.”

A week ago, the Spanish government announced the country would be targeting a new, higher debt-to-GDP target of 5.8%, which is well above the 4.4% level the prior government had agreed with the European Union.

Ben May, European economist at Capital Economics, said the euro-zone finance ministers will likely stamp their OK on Greece’s second bailout package on Monday, with the IMF following suit on Thursday.

“Accordingly, if Greece meets its fiscal and structural reform targets, an aid package will be in place to ensure that its financing needs are met until the end of 2014,” he said, in emailed comments.

“But as we have repeatedly argued, we don't think that the second bailout will solve Greece’s fundamental problems. In the near term, there remains a risk that after elections in April or May the new government seeks to renegotiate the bailout deal, perhaps prompting the package to be withdrawn.

“Even if the new government doesn't try to reopen negotiations, it could decide to walk away from the bailout deal further down the line if the troika [the IMF, the European Central Bank and the European Commission] demands more austerity,” said May. “Accordingly, it will only provide Greece and the euro zone with a bit of time at best.”

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